Leon Cooperman Tries Crocs on for Size

by Will Ashworth | January 14, 2013 11:00 am

Legendary hedge fund manager Leon Cooperman appeared on CNBC[1] Jan. 2 to discuss his firm’s top stock picks for 2013. Among that group is Crocs (NASDAQ:CROX[2]), the footwear manufacturer made famous for its brightly colored clogs. Cooperman didn’t expound on the reasons why he likes Crocs, but given his value bent, I can only assume he thinks it’s cheap.

I’m sure there’s more to it than that, so let’s look at some other reasons why the billionaire might find it attractive.

It turns out Cooperman isn’t the only one who likes Crocs. Goldman Sachs (NYSE:GS[3]) recommends that investors buy its January $15 calls in the belief that Crocs management is shortly going to raise fourth-quarter guidance. Originally it said the company would break even in Q4. Taposh Bari, Goldman’s analyst covering Crocs, believes it could make an announcement at the ICR XChange investor conference Jan. 15-17 in Miami.

Interestingly, Barron’s points out that Croc’s stock has gained or lost an average of 6%[4] in the week following the last 11 conferences. I don’t know if Cooperman knew before he bought its stock, but a 6% boost in a year that most expect will barely reach double digits seems like a pretty good bet.

Crocs announced in December that it had increased its line of credit by 30%, or $30 million, to $100 million. As part of the new arrangement, Crocs can use up to 75% of its credit line to repurchase shares to a maximum of $50 million per quarter and $150 million per year. Its current 2007 authorization allows for the buyback of 5.5 million shares.

To that end, it repurchased 1.1 million shares between the beginning of November and Dec. 7 at an average price of $12.75 per share. That wasn’t at the absolute bottom of its November swoon, but it was pretty darn close. History will show this to be a very prudent buy because the shares hadn’t been that low since September 2010.

Revenues in 2012 will once again be over the $1 billion mark, growing an estimated 12% year-over-year. Its most recent quarter (Q3) was a good one, except for its business in Europe, which saw a drop in wholesale revenue, and for its Internet business. On the bright side, revenues at company-owned retail stores in Europe grew 74% in Q3, almost completely making up for the deficit in the other areas.

Globally, all three of Crocs’ segments increased revenues in the third quarter, with its retail stores leading the way. Most important, its operating margin in the quarter improved 80 basis points year-over-year. It’s definitely moving the merchandise profitably.

In an effort to better present itself to consumers, Crocs is opening more of its own retail stores while closing kiosks that don’t allow for the full range of products. This is definitely a smart move because you wouldn’t think footwear lends itself to spaces without room to sit down and try things on. At the pace Crocs is opening stores, it could have 1,000 within five years. The economy will have to keep moving ahead, but it’s very doable.

Fifteen months ago, I declared that Deckers Outdoor (NASDAQ:DECK[5]) was a better company than Crocs[6]. My knock against Crocs was that it was building revenues at the expense of profits. That’s never a good thing.

But here I sit all these months later, and the roles have completely reversed. Crocs will likely hit 15% operating margins in 2012, a goal it’s had since 2011. Its business looks in great shape with revenues and earnings growing and net cash of $303 million. Now, Deckers appears to be heading backwards, and it sits on $213 million in net debt. While I like Deckers’ long-term prospects — diversification beyond UGG — it has a lot of work to do in 2013. It appears the shoe is definitely on the other foot.

Cooperman didn’t become a billionaire for nothing. His Crocs pick at this point — with the stock producing negative returns in each of the last two years — is perfectly timed. He’s gotten on board before the rest of the investing world figures out that Crocs isn’t such a bad company after all.

As of this writing, Will Ashworth didn’t own any securities mentioned here.

Endnotes:

Leon Cooperman appeared on CNBC: http://www.cnbc.com/id/100349212/Leon_Coopermanrsquos_Top_Stocks_for_2013